Bill Discounting versus Factoring
What is bill discounting?
Bill discounting, also known as purchase of bills and invoice discounting are all the same type of financial instrument used to provide working capital to small and medium enterprises from invoices raised.
Bill discounting is a financial arrangement where a funder advances a sales bill from a business before it is due, charging a fee for the early payment.
Definition of bill discounting
Bill discounting, also known as invoice discounting can be defined as the advance selling of a bill to an intermediary (an invoice factoring or invoice discounting business) before it is due to be paid, less administrative charges, fees and interest. The interest and fee is calculated based on the risk of the non-payment from the end customer, and so a funder will look at the creditworthiness and trading history of the customer rather than the business it is funding for payment.
Bills and invoices are technically known as a ‘bill of exchange’. A bill of exchange is essentially an instrument with value which is payable to the bearer of the goods or the order.
Bill discounting versus invoice discounting
Bill discounting and invoice discounting intermediates the difference between buyers wanting longer payment terms and sellers wanting to be paid straight away. Bill discounting bridges this gap by allowing an intermediary, normally a factoring company or a financier, to purchase a bill of exchange from a seller ahead of it being paid, in return for immediate payment of the invoice, less fees.
Bill discounting allows ‘bills of exchange’ to be discounted immediately, thus helping companies better manage the flow of cash through their business, pay employees and cover business expenses rather than waiting 30-180 days for invoice payment.
How does bill discounting work?
- The business sells its goods or services, offering credit and raising an invoice to the buyer / customer
- Once the invoice (or bill of exchange) is accepted by the end customer, they agree that they will settle the invoice on an agreed date in the future, normally 30 days, but it could be many more
- The business approaches a financing company with the invoice raised
- The financing company assesses the creditworthiness of the invoice, legitimacy of the bill raised and calculates the risk of advancing the invoice
- The funds are then released to the business, less relevant fees and charges which are agreed
- The business gets the funds
- Once the payment is due from the buyer, the financier collects payment on behalf of the business from the end customer
What are the advantages of bill discounting?
Invoice financing has many pros for small businesses, the main being a material improvement in the businesses cash position.
- Improved cash flow and working capital
- Can be good for new startups
- Borrower only pays on the amount of money used, unlike a business loan
- Risk of bad debt or non payment can be passed on to the financier
- Quick to access – funds can be released within 24 hours
At Trade Finance Global, our international team of bill discounting experts are here to help your business access working capital. Find out more about invoice finance and the different types in our guide here, or get in touch with our team and speak to one of our advisors.